Monday, November 03, 2008


The collapse of the hedge fund industry means that many investors will convert from being partial short sellers to long buyers. The switch will not change the fundamentals of the underlying stocks but it will change the psychology of the market. The "investor class" is going to once again pull hard for the success of the good old USA.

The ying and the yang between politics and markets is always a beautiful and an ugly thing to watch. When political decisions are not in sync with economic decisions, the damage is not great if the length of the divergence is not long. When one group wins total political control and suspend rational economic thought in lieu of enjoying political power, the damage is great.

Sensible people realized long ago that minimum wage laws hurt the poorest people by pricing them out of the market place. Minimum wages and regulations that make it tough for an individual to hire a gardener or a house keeper force many an unskilled person out of the market place. Obama's program will not initially be as bad for the economy as would another strong push for high minimum wages. Given time, democrats will push for high minimums.

The Obama tax credit program is a subsidy for low skilled workers. His plan is an expansion of the earned income tax credit. This Obama program will simply allow low wage workers to get credit for social security contributions while keeping the money to spend. Instead of "fixing" social security, Obama will raid the current SS surplus, setting up the need for massive revenue increases or benefit cuts later. As we know, Obama will ultimately "fix the system" by taxing upper income earners heavily. He will convert SS to even more of a government mandated charity. As we have seen from the housing crisis, when the government forces charity on the market place, we all get stuck with the bill later.

The political decision of Obama to divorce the tax increase pain from the short term gain was smart from the political point of view. Anyone who talks against government programs to help the poor buy a house or retire comfortably or get free health care is likely to be in an awkward position at best. As Bush showed, conservatives can sometimes win by professing to be compassionate. Politically it seems more likely that the winner is the one who is best at hiding the total cost of his programs.

The minimum wage is less passionate than the earned income tax credit. The earned income tax credit does not necessarily cost the employer more. The money for the earned income credit comes from the high skilled high wage employee and his employer. In such as system the people are given the task of deciding just how much should be confiscated from the well off to give to the poor.

The basic laws of economics tell us that the Obama policy will, at the margin, drive highly skilled jobs to other countries. His policy will subsidize low wage jobs in America, so we will have more of those in the USA.

During the coming strong economic recovery, everyone will "win". The result of Obamanomics will be a relative win by the poor and a relative win for countries other than the USA but the USA's time to win big is here. It will be hard to see the damage done by Obamanomics because the good times are ready to roll.

It is a mistake to think that Obamanomics will make the USA competitive with labor in China or India. The USA will continue to make the big bucks through our skill in areas that take high levels of skill or much capital. Even though Obama will tax capital more, the US on balance still taxes capital less than a number of other wealthy countries. We will continue to make big money off high tech areas such as computer design and computer software, genetic and medical research etc. We will continue to sell computer games, movies, books and music. The profit margins on intellectual properties are huge.

Despite the bashing by Obama, there is a consensus building that corporate tax rates in America, particularly for small businesses, need to be lowered. We cannot expect businesses to locate in the USA where corporate tax rates are 35% when they can find compatible conditions in Ireland while paying only 15% in taxes.

The republican senator from Kentucky could soon be the most powerful man in the world. If Obama truly wants the USA to "Change", he will need to craft many a compromise with McConnell. Pass just one good compromise and the consumer confidence index will surge off its current lows. This indicator has been in its current neighborhood only a few times in our history, it is below the lows set in 1974 and 1982, just before the markets broke out.